Distribution to ADS holders: Overview, definition, and example
What is distribution to ADS holders?
Distribution to ADS holders refers to the process by which holders of American Depositary Shares (ADSs) receive dividends, interest, rights, or other benefits related to the underlying foreign securities represented by the ADSs. Since ADS holders do not directly own the foreign shares, distributions are made by the depositary bank that holds the underlying shares on behalf of ADS holders.
Why is distribution to ADS holders important?
This process is important because it ensures that ADS holders receive the economic benefits of owning the underlying foreign securities, even though they do not hold the shares directly. Whether it’s a cash dividend, stock dividend, or rights offering, the depositary plays a critical role in collecting the benefit from the foreign issuer and passing it on to the ADS holders. Clear procedures for distributions help ensure transparency, fairness, and alignment with market expectations.
Understanding distribution to ADS holders through an example
A Brazilian company declares a cash dividend on its common shares. For ADS holders in the United States, the depositary bank receives the dividend in Brazilian reais, converts it into U.S. dollars (minus fees and taxes), and distributes the resulting amount to the ADS holders on record. This allows investors in U.S. markets to benefit from the foreign dividend without holding the shares directly or managing currency conversions.
Example of how a distribution to ADS holders clause may appear in a contract
Here’s how a distribution to ADS holders clause may appear in a deposit agreement:
"The Depositary shall, as promptly as practicable, distribute to the Holders of ADSs all cash dividends, distributions, or other property received by it in respect of the Deposited Securities, after deduction of applicable fees, taxes, and charges, in accordance with the terms hereof."
Conclusion
Distribution to ADS holders is the mechanism that connects foreign issuers with U.S. investors by delivering the financial benefits of the underlying shares. It is managed by the depositary bank and typically involves conversion, recordkeeping, and distribution steps. Understanding how these distributions work is essential for ADS investors and helps ensure fair treatment in cross-border investment structures.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.